Saturday, November 30, 2013

“What gets measured gets done” – it
seems like the source of this quote, often attributed to management
expert Peter Drucker, isn’t certain, but its meaning is clear and very
relevant for every SaaS founder. If you want to make sure that you make
best use of your scarce resources, you need to have a clear
understanding of your objectives and the KPIs that measure your progress
towards those objectives.

Depending on the stage that you’re in
you’ll want to focus on different metrics. I’ve tried to illustrate this
in the following diagram:

(click image for larger version)

As
you can see, I segmented the company lifecycle into three major phases:
pre product/market fit, post product/market fit but pre-scale, and
post-scale (being fully aware that there is no distinct definition of
“product/market fit” and “scale” and that the transition from one phase
to the next one is a gradual one). At the bottom I noted what these
phases usually mean in terms of the stage of your product and company
and which funding level it typically corresponds with. Note that the
x-axis is not a true-to-scale representation of time elapsed. For a
true-to-scale representation I would have to add much more space between
the Series A and the Series B and between the Series B and the Series
C.

The key message of the chart is that in the beginning you can
focus on a small set of metrics, but as time goes by and you’re making
progress you need to add additional KPIs to your cockpit.

Let’s have a closer look at each of the three phases.

Pre product/market fit

I’ve written about it before in my posts about sales and unscalable hacks:
In the very beginning, when you’re in the process of finishing the
first version of your product and trying to get the first customers, you
shouldn’t worry too much about metrics. Firstly there just aren’t many
metrics to keep an eye on yet. Secondly you should be obsessively focused on getting to product/market fit (Marc Andreessen’s words), and that means you should spend your time talking to customers and developing the product.

That said, the following metrics are relevant in the pre product/market fit phase:

User
feedback: Most of the user feedback that you collect in this phase is
qualitative rather than quantitative, but if you talk to a larger number
of potential users you might also be able to add some quantitative elements. For
example, you could ask users to rate your prototype and see if that
rating goes up over time.

Development velocity: I
don’t know if (or how strictly) you should use a software development
methodology like Scrum, which allows you to nicely visualize your
development velocity, in the very early days, when you’re maybe just two
developers – I would be very interested in your thoughts on that
question. At any rate, however, I think it’s a good idea to break down
your project into a larger number of smaller pieces, features or “story
points” early on. This will help you in getting an understanding of your
development speed, which later on will become more and more important.

Waiting
list signups: When you put up a landing page to collect email addresses
for your waiting list, track how many signups you’re getting. Driving
signups probably isn’t a key priority for you at this stage but it’s an
indication of interest in your product and hey, you’ll still have some
space on your Geckoboard which you can fill with a nice chart! :)

Once
you let potential customers try your product, the real fun begins. At
that point, you should track signups and some indicators for activation
and usage, which, for obvious reasons, are precursors to your ultimate
goal, paying customers. What the right indicators for activation are
depends on the type of your product. It could be a profile completion
and the setup of a customized pipeline in case of a CRM application, the
installation of a tracking snippet for a Web analytics product or… you
get the idea. Similarly, usage metrics are highly specific to your
application, so think about what the right events and parameters are in
your particular case and make sure that you instrument your application
accordingly. If your solution is a little more enterprisey and you’re
working with a higher-touch sales model you may also want to track
qualified leads along with trial signups.

In order to succeed you
need happy customers who do free marketing for you, otherwise customer
acquisition will always be an uphill battle. Therefore you should also
consider regular Net Promoter Score (NPS) surveys. If you’re looking for the best survey tool, I have a tip for you.

Post product/market fit, pre scale

As
you’re slowly but surely getting to product/market fit and starting to
get the first paying customers (yay!), your trial-to-paid conversion
rate becomes one of the most vital metrics. It’s hard to give you a
benchmark, since your conversion rate not only depends on the quality of
your product and the onboarding experience but also on many other
things such as leads quality, pricing and many other
factors. With that caveat in mind, the typical range that we’re seeing
is between 5% and 25%.

Equally important is your retention,
usually tracked by measuring churn (the inverse of retention), since
your CLTV (customer lifetime value) is a direct function of how much you
charge your customers and how long they stay on board. As a very rough
rule of thumb you should try to get your churn rate to 1.5-3% per
month.

Make sure to track churn not only on an account basis but
also on an MRR basis. Your MRR-based churn rate will hopefully be
significantly lower than your account-based churn rate, since smaller
customers tend to have a higher churn rate and because your loyal
customers will hopefully pay you more and more over time. Also, make
sure that you avoid SaaS Metrics Worst Practice #8, mixing up monthly and yearly plans. Finally, if you want to get a good estimate of your customer lifetime, take a look at retention on a cohort basis.

If
you don’t have a KPI dashboard yet that gives you an at-a-glance look
at your key metrics, now is the time to build one. Here’s a template that I’ve created, along with some additional notes.

As
you’re moving on, arguably the most important metric becomes MRR, and specifically net
new MRR that you’re adding each month. Net new MRR is calculated using
this simple formula:

Also
keep an eye on your ARPA (average revenue per account). It’s an
important metric at all times for obvious reasons, but as you’re nearing
the next phase it’s becoming even more important.

Post scale

When
you’ve reached a certain level of success, say you’re at around $500k
MRR, the biggest challenge (besides growing a bigger organization and
mastering all kinds of growing pains of course) is to find ways to
profitably acquire customers at a much higher scale. By this time you’ve
picked all the low-hanging fruits, and you may have maxed out what you
can reasonably spend on AdWords to buy traffic and leads.

Therefore
you’ll have to focus on the relationship between your CLTV and your
CACs (customer acquisition costs), your CLTV/CAC ratio, which measures
the ROI on your sales and marketing investments. Another way to look at
it is your CACs payback time, which tells you how many months of
subscription revenue it takes to recoup customer acquisition costs. If I
had to choose I’d pick this one, since CLTV is always an estimate which
can be more or less accurate.

A few last points:

Many
startups struggle to get all these numbers together because different
numbers are collected in different systems (e.g. Web analytics software,
billing systems, self-made databases,...), which often leads to
inconsistencies. I don’t have a simple and general advice for this
issue, I might address it in another post.

If you’re
not sure which metrics to track, e.g. which events in your application,
err on the side of tracking too much data even if you have no immediate
use for it. You never know if it becomes useful in the future, and the
costs for tracking large amounts of data are no longer very high
nowadays.

Monday, November 04, 2013

A little more than a week ago we did the second PNC SaaS Founder Meetup. Around the same time a year ago we organized our first SaaS Founder Meetup in San Francisco, this time we did it in Berlin.

Thanks to the incredible speakers and guests who came to the event it's been a truly amazing day, and I think all of the SaaS founders returned with a number of actionable insights which they can't wait to implement.

I was going to write a longer post about the event but decided to create some slides instead which hopefully capture a little bit of the great spirit of the meetup. Here you go: